Secondary Markets are Real Markets

I'm surprised to see Felix Salmon joining the crowd of liberal bloggers defending administration bullying of the holdouts on the grounds that they bought the debt at distressed prices. (Though it's not clear that all the holdouts are vulture funds). Secondary markets for assets are real markets. Indeed, they are very important markets. Just ask homeowners in Detroit what happens to the value of an asset with no secondary market.

Chrysler was able to raise money in recent years because debtholders knew that they could sell that debt to someone else. If that "someone else" had thought that there were special moral--and apparently, therefore legal--rules for people who purchase debt on the secondary market, they would have paid less for it. And if the price of assets on the secondary market falls, so does the price of assets on the primary market. That's why you don't see a lot of new homes being built in Florida.

Thus, swatting the secondary buyers means higher interest rates for the primary fundraiser. There's a reason we order the seniority of claims by how secure the loan was, rather than how much we like the creditors.

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